Client Protection and Risk Management

There are various types of risk to which a participant in the futures market is subjected.

Market risk

Firstly, there is the market risk to a speculator of adverse price movements. It goes without saying that no one has a responsibility to protect a participant from this particular risk.

However, the participant has a right to expect that the two other types of risk are removed to the greatest possible extent so that he can be left to concentrate on the management of market risk for himself. The other two types of risk are counter-party risk and settlement risk.

Counter-party risk

When a forward contract is concluded, it is one-on-one and the counter-party is known for his ability to fulfil the contract's obligations. In the futures market, however, neither the buyer nor seller need be known to each other at the time the contract is concluded. Safex and the clearing house manages this counter-party risk.

Through the rules, it ensures that the clearing members of Safcom are sufficiently captilised and that its guarantee mechanisms are adequate. Should any party default, the clearing member is responsible to make up the shortfall to the clearing house. Safcom holds each clearing member accountable for each side of each transaction conducted by members of clients for which it stands good in every open transaction.

In addition to the net worth needed, each clearing member supplies a R250 000 payment to a guarantee loan fund to provide contingency funds in the event of default. Safex also carries insurance of R10m which it may increase should volumes warrant it.


Each day, Safex calculates profits or losses on each open contract by a process known as "marking-to-market".

The process involves averaging out the closing bid and offer prices quoted by Safex members on screen for every open futures contract at the end of each day. These average prices are then compared with the bought or sold prices transacted by each client on their contracts, the so-called mark-to-market profit is calculated, and credited or debited to each account accordingly.

Safcom then collects from, or pays to, each clearing member, in cash, the net amounts which are known as "mark-to-market, profit and losses". Members then pass these on to their clients. On succeeding days the process is repeated, the comparison being with the previous day's mark-to-market price.

To manage risk and avoid undue exposure, no participant is permitted to build up large unrealised losses. Each and every loss has to be paid for as it arises. To ensure this takes place, a margining system is used.

The Margining System

In order to arrive at an appropriate margin, Safex estimates the maximum amount that each participant could reasonably lose from one day to the next. The client is then required to lodge with Safex, in cash, a margin equal to this maximum potential daily loss - known as "initial margin".

In practice, this margin is roughly 10% of the value of the futures contract to be bought or sold, and in essence, is a good faith deposit.

It is due when a futures contract is opened, earns interest at a money-market related rate, and is returned to the client when the contract is closed. Margin accounts are debited or credited daily to reflect changes on positions held in futures contracts as they occur.


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